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AT&T's CEO Stephenson looks for a coping strategy

by Chris Nolter | Published January 27, 2012 at 4:15 PM

Between his expressions of frustration and scorn for the Federal Communications Commission, AT&T Inc. chairman and CEO Randall Stephenson outlined some of the company's dealmaking priorities for the coming two years in the telecom's latest investor call.

It is no secret that AT&T is compelled to acquire wireless spectrum following the collapse of its T-Mobile USA Inc. buyout. Stephenson said the Dallas telecom must also consider big changes, including possible sales or spinouts, for its directories and rural landlines, two business lines that large, incumbent telecoms in general have exited over the last decade.

The FCC has said that it wants to make more licenses available to avoid a spectrum crunch as smartphones and tablets proliferate. Stephenson faulted the agency during the Thursday, Jan. 26, earnings call for making slow progress and for giving confusing signals about licenses that are already in the market.

"When you kind of look out and span the horizon or scan the horizon, there are no secrets," Stephenson said. "Everybody knows where the spectrum resides and who is holding it."

Following recent actions by the FCC, he said, the question is "how much spectrum we're allowed to hold, who we're allowed to do business with and so forth."

When the FCC reviewed the T-Mobile deal, he said, AT&T was surprised to learn that it would exceed spectrum caps in more than 200 markets. The carrier was not aware of the limitations, which Stephenson said were newly imposed.

In the FCC's December approval of a nearly $2 billion purchase of licenses from Qualcomm Inc., Stephenson said that the agency used the previous spectrum limits.

AT&T has ample spectrum through 2013. The telecom would look for licenses that it could acquire from other telecoms, and it would be eager to participate in government auctions of licenses.

It will be difficult for the carrier to match the spectrum it would have gained with the T-Mobile acquisition.

"Wresting spectrum from existing license holders means they would have to make deal-by-deal moves in different markets," said Ken Rehbehn of Yankee Group.

The FCC could make more licenses available in the 700 megahertz and Advanced Wireless Spectrum, or AWS, bands, Rehbehn said. AT&T has said that it favors spectrum on both of those bands.

"It's a long process," Rehbehn said of the government's methods for identifying and auctioning licenses.

AT&T has not expressed confidence in the FCC's ability to bring the spectrum to market efficiently and fairly.

"I hope I'm wrong, but it appears the FCC is intent on picking winners and losers rather than in letting these markets work," Stephenson said.

The wireless spectrum portfolio isn't the only problem that AT&T is trying to fix.

The telecom reported a fourth-quarter charge of 48 cents per share on its directories business. "We're going to have to decide, do we keep it or do we restructure it?" the AT&T chief said.

There are also questions about rural phone systems, and in particular the economics of developing high-speed Internet services in less-populated markets.

"The issue here is, do you have a broadband product for rural America?" he asked. The company looked for an economically viable solution, he said. "We're not finding one."

If the T-Mobile USA deal had gone through, Stephenson said, the company could have had enough spectrum and resources to provide mobile broadband service in rural markets.

Phone companies have often sold or spun out directories and rural landlines. They also use a tax-free reverse-Morris Trust structure with assets spun out to shareholders and merged with a company of equal value.

But recent divestitures by Verizon Communications Inc. have not turned out well. Regulatory approval for some deals, particularly before state officials, could be challenging.

Verizon sold its Hawaiian unit to Carlyle Group in 2005 for $1.6 billion. The business had difficulty developing systems for billing and other business systems, and it sought bankruptcy protection in December 2008.

More recently, Verizon spun out local phone businesses in Maine, New Hampshire and Vermont and merged the operations with FairPoint Communications Inc.

The $2.4 billion transaction closed in 2008. FairPoint could not manage its inflated debt load, however. Operations suffered, and the company sought bankruptcy protection in October 2009.

Verizon spun off its Yellow Pages business, initially called Idearc Inc., in 2006. The directories publisher sought bankruptcy protection in 2009 and emerged as SuperMedia Inc.

Of course, there have been exceptions. Aggressive rural acquirer Windstream Corp. was formed by the merger of Valor Communications Group Inc. with wireline operations spun off by the former Alltel Corp.

Sprint Nextel Corp. broke off its Embarq Corp. local phone business in 2006. CenturyTel Inc. purchased the business for $11.6 billion in 2009.

Verizon had a similar spinout-merger of landline operations in 14 states with Frontier Communications Corp. in 2009. The $8.6 billion price tag included about $5.3 billion in stock.

Frontier's stock has lagged, but the company maintains a high dividend payout.

John Hodulik of UBS Investment Research suggested in a Friday note that AT&T could engineer a similar tax-efficient deal for its landline business.

"We believe this could come in 2012 and may include a restructuring of the business to dramatically cut costs or shift these assets into a new entity that could be spun off or combined with another entity in a Morris Trust transaction," he wrote. "Despite its low stock price, we believe Frontier would still be the leading candidate to combine with this entity."

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AT&T's CEO Stephenson looks for a coping strategy

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